for bethuel best - 2000 words in 24 hours
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969x2250wordsgovernanceandsustainablitydue8thjan.zipWeek 1 G&S BB.pptx
Dr Samuel Komakech BSc (Econ) MSc Mphil PhD DITA FCCA FHEA
Hugh Aston Building: HU3.54
0116 207 8369
Surgery Hours:
Mondays – 13:00 to 14:00
Tuesdays – 14:00 to 15:00
ACFI 3423 Governance & Sustainability 2018/2019 Lectures
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Introduction to the Module
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Learning outcomes – refer to page 4 of the module handbook
Module team – refer to page 4 of the module handbook
How the module is going to be taught – refer to page 5 of the module handbook
Assessment – refer to page 11 and the assignment briefs on Blackboard
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Engagement
“Do not wait to strike till the iron is hot; but make it hot by striking.”
“Live as if you were to die tomorrow. Learn as if you were to live forever.”
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Assessment
Element 1 – Case Study:
Case study, to be submitted by Friday, 16th January 2019, 23:59, in week 16 via Turnitin. (Please refer to assignment brief available on Blackboard). 50% of final grade.
Element 2 – Academic Essay:
Academic essay (comprising 50% of final grade).
Pass Mark:
You must achieve an overall average of 40%.
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Assessment
“Successful and unsuccessful people do not vary greatly in their abilities. They vary in their desires to reach their potential.”
“Even if you’re on the right track, you’ll get run over if you just sit there.”
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Governance
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What is Governance?
Governance:
defines relationships and the distribution of rights and responsibilities among those who work with and in the organisation
determines the rules and procedures through which the organisation’s objectives are set
provides the means of attaining those objectives and monitoring performance
defines where accountability lies throughout the organisation
framework of rules and practices
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What is Governance?
How board of directors ensures accountability, fairness and transparency
Company’s relationship with its stakeholders (e.g. Financiers, customers, management, employees, government and the community)
System of rules, practices and processes
Company is directed and controlled
Note: Definitions can be challenging, subtle, complex and powerful.
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What is Governance?
Global Network of Director Institutes’ Definition:
“Governance refers to the framework of rules, systems and processes put in place to oversee and monitor – or “govern”.
Good governance underpins good conduct and the good judgment by those who are charged with running an organisation.”
GNDI Secretariat (2015)
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What is Governance?
United Nations Economic and Social Commission for Asia and the Pacific’s Definition:
“Simply put "governance" means: the process of decision-making and the process by which decisions are implemented (or not implemented).”
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What is Governance?
Institute of Governance’s Definition:
“The complexity of governance is difficult to capture in a simple definition.”
Definitions of governance rest on three dimensions:
authority;
decision making; and
accountability.
“Governance determines who has power, who makes decisions, how other players make their voice heard and how account is rendered.” (Institute of Governance)
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What is Governance?
Areas where the term governance is often used:
Hirst (2000) identified five areas where the term governance is used; i.e. in the fields of:
economic development;
international relations – governance without government;
self governance – community governance;
markets and their institutions; and
corporate governance.
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Good Governance
Features of good governance:
Participation: - All men and women, inclusive of the physically challenged, should have a voice in decision- making, either directly or through legitimate intermediate institutions that represent their interests.
Rule of law: - Laws, regulations and codes of conduct should be fair and enforced impartially.
Transparency: - built on the free flow of information. Processes, institutions and information are directly accessible to those concerned with them, and enough information is provided to understand and monitor them.
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Good Governance
Features of good governance cont.
Responsiveness: - Institutions and processes try to serve all stakeholders within a reasonable timeframe.
Consensus orientation: - Good governance mediates differing interests to reach a broad consensus on what is in the best interest of the group and, where possible, on policies and procedures.
Equity: - All men and women have opportunities to improve or maintain their well-being.
Effectiveness and efficiency: - Processes and institutions produce results that meet needs while making the best use of resources.
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Good Governance
Features of good governance cont.
Accountability: - Decision-makers in government, the private sector and civil society organizations are accountable to the public, as well as to institutional stakeholders. Accountability differs depending on the organization and whether the decision is internal or external.
Strategic vision: - Leaders and the public have a long-term perspective on good governance and human development, along with a sense of what is needed for such development.
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Good Governance
Good governance is acknowledged to be essential for the success of any organisation and is now more important than ever. The British and Ireland Ombudsman Association (BIOA) has provided a guide to principles of good governance, which includes the following:
Independence: ensuring and demonstrating the freedom of the office holder from interference in decision making
Openness and Transparency: Ensuring openness and transparency in order that stakeholders can have confidence in the decision-making and management processes of the scheme
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Good Governance
Accountability: Ensuring that all members of the scheme, including the office holder, staff members and members of any governing body, are seen to be responsible and accountable for their decisions and actions, including the stewardship of funds (with due regard to the independence of the office holder)
Integrity: Ensuring straightforward dealing and completeness, based on honesty, selflessness and objectivity, and ensuring high standards of probity and propriety in the conduct of the scheme’s affairs and complaint decision making
Fairness: based on equity and rule of law
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Good Governance
Clarity of purpose: Ensuring that stakeholders know why the scheme exists and what it does, and what to expect from it.
Effectiveness: Ensuring that the scheme delivers quality outcomes efficiently and represents good value for money.
Point for reflection: Compare the BIOA principles with those of:
GNDI’s included in their perspective paper of 2015 (available on Blackboard).
United Nations Economic and Social Commission for Asia and the Pacific (available on Blackboard).
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Good Governance
Possible benefits of good governance
People trust your organization
You know where you’re going
Your board is connected to your membership and stakeholders
You get good decisions; people value your work
You have the ability to weather crises
Financial stability
Sustainable development
Social cohesion
Efficiently managed environment
Successful public sector reform programme that promotes equity and sustainable development
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Sustainability
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Meaning:
In ordinary English language usage, sustainability the ability to be sustained, supported, upheld, or confirmed.
In Environmental Science, it means the quality of not being harmful to the environment or depleting natural resources, and thereby supporting long-term ecological balance.
Sustainability
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Thomas Jefferson Sustainability Council’s definition:
"Sustainability may be described as our responsibility to proceed in a way that will sustain life that will allow our children, grandchildren and great-grandchildren to live comfortably in a friendly, clean, and healthy world. …
Sustainability
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Thomas Jefferson Sustainability Council’s definition cont.:
“…That people:
Take responsibility for life in all its forms as well as respect human work and aspirations;
Respect individual rights and community responsibilities;
Recognize social, environmental, economic, and political systems to be inter-dependent;
Weigh costs and benefits of decisions fully, including long-term costs and benefits to future generations;
Acknowledge that resources are finite and that there are limits to growth;
Assume control of their destinies;
Recognize that our ability to see the needs of the future is limited, and any attempt to define sustainability should remain as open and flexible as possible."
Sustainability
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Sustainable Development
What is sustainable development?
http://www.youtube.com/watch?v=B5NiTN0chj0
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Sustainable Development
World Commission on Environment and Development:
Brundtland Report (1987:8) defines sustainable development as: "development that meets the needs of the present without compromising the ability of future generations to meet their own needs”.
But it means different things to different people.
Lack of consensus on its meaning makes implementation of policies on it challenging.
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World Business Council on Sustainable Development
"Sustainable development involves the simultaneous pursuit of economic prosperity, environmental quality and social equity. Companies aiming for sustainability need to perform not against a single, financial bottom line but against the triple bottom line." "Over time, human and social values change. Concepts that once seemed extraordinary (e.g. emancipating slaves, enfranchising women) are now taken for granted. New concepts (e.g. responsible consumerism, environmental justice, intra- and inter-generational equity) are now coming up the curve.“
Sustainable Development
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Sustainable Development
Interfaith Centre on Corporate Responsibility (ICCR) "Sustainable development...[is] the process of building equitable, productive and participatory structures to increase the economic empowerment of communities and their surrounding regions.”
Friends of the Earth Scotland "Sustainability encompasses the simple principle of taking from the earth only what it can provide indefinitely, thus leaving future generations no less than we have access to ourselves."
http://www.foe-scotland.org.uk/
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Sustainable Development
Components of Sustainable Development:
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Understanding sustainability and sustainable development:
The UK Government’s sustainable development strategy outlines four objectives to be met at the same time:
social progress which recognises the needs of everyone;
effective protection of the environment;
prudent use of natural resources; and
maintenance of high and stable levels of economic growth and employment.
Sustainable Development
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Sustainable Development
Other terms that have been used in this regards include:
Corporate social responsibility.
http://www.youtube.com/watch?v=yP_rxsSJZ9g
Corporate citizenship.
http://www.youtube.com/watch?v=YPPFjoeykmM
Corporate environmental management.
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Sustainable Development
Definition: Carroll (1983:608)
“corporate social responsibility involves the conduct of a business so that it is economically profitable, law abiding, ethical and socially supportive. To be socially responsible then means that profitability and obedience to the law are foremost conditions when discussing the firm’s ethics and the extent to which it supports the society in which it exists with contributions of money, time and talent”
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Sustainable Development
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Sustainable Development
All these definitions are about:
Living within the limits
Understanding the interconnections among economy, society, and environment
Equitable distribution of resources and opportunities
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Sustainable Development
Global efforts:
International Environmental ‘Summit’ Meetings:
The UN has sponsored several meetings on environmental issues including:
Rio de Janeiro Earth Summit, Brazil, 1992
Earth Summit New York 1997
Johannesburg, South Africa, 2002
Rio+20, 20th Anniversary of the Earth Summit, 2012
United Nations Sustainable Development Summit 2015
Paris 2015: getting a global agreement on climate change
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Seminar Week 2
Define sustainability and discuss how it affects corporate governance.
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Week 2 TCOCG BB.pptx
Corporate Governance
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What is Corporate Governance?
Defining Corporate Governance:
The need for governance exists anytime a group of people come together to accomplish an end.
The Business Dictionary defines corporate governance as:
“The framework of rules and practices by which a board of directors ensures accountability, fairness, and transparency in a company's relationship with its all stakeholders (financiers, customers, management, employees, government, and the community)”.
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So What is Corporate Governance?
“Corporate governance is the system by which companies are directed and controlled.” Cadbury (1992: 14).
“Corporate governance is defined as the system of checks and balances, both internal and external to companies, which ensures that companies discharge their accountability to all their shareholders and act in a socially responsible way in all areas of their business activity.” Solomon (2013: 7)
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Comprises:
Explicit and implicit contracts between the corporation and the stakeholders for distribution of responsibilities, rights and rewards.
Procedures for reconciling the sometimes conflicting interests of stakeholders in accordance with their duties, privileges and roles.
Procedures for proper supervision, control and information flows to serve as a system of checks and balances.
Corporate Governance Framework
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Corporate Governance Issues
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Corporate Governance Issues
Corporate governance affects us all. If not handled properly, a lot of things can go wrong. For example at Sports Direct and the Failed BHS, where governance was flawed a lot of things went wrong and many people were affected.
We need to seriously look at why corporate governance fails us and what we can do to improve it.
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Can you identify these persons?
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How about these persons?
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Corporate Governance Issues
Other points to consider:
https:// www.youtube.com/watch?v=sKjdT8I6TnE
Would you have withdrawn your fund from Northern Rock?
Why do you think depositors behaved the way they did?
What were the probable consequences of these?
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Major Corporate Governance Issues
Corporate governance issues include:
Duties of directors (corporate failures and scandals).
Composition of the board - checks and balances (governance structures).
Fraud – manipulation of results (reliability of financial reporting and external auditors).
Remuneration of directors (including rewards).
Laws and regulations (penalties for poor governance).
Accountability to shareholders and other stakeholders – rights and responsibilities of shareholders.
Corporate image (reputation) – conduct of directors.
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Major Corporate Governance Issues
Integrity of management – responsibility of the board for risk management and internal control systems.
Corporate social responsibility and business (accounting) ethics and creative accounting (improper accounting).
Regulation (compulsory regulations vs voluntary best practice): role of regulators; failure of regulation; credibility; confidence; trust.
Public and non-governmental bodies’ corporate governance.
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Principles of Governance for Corporations
Include:
Transparency;
Accountability;
Responsibility; and
Fairness.
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Principles of Governance for Corporations
The OECD recommends:
Ensuring the basis of an effective corporate governance framework
The rights of the shareholders and key ownership functions
Equitable treatment of shareholders
Stakeholders should play a role in corporate governance
Disclosure and transparency
The responsibilities of the board
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Theoretical Foundations of Corporate Governance (CG)
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Theories Linked to CG
Many disciplines have influenced and continue to influence CG.
Various theories (having foundations in economics, finance, accounting, law and organisational behaviour) have influenced the development of CG.
Four key theories of CG are:
agency theory;
transaction costs theory;
stakeholder theory; and
stewardship theory.
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Theories Linked to CG
Other theories include:
managerial hegemony and class hegemony theories;
resource dependence theory;
path dependence theory;
signalling theory;
institutional theory;
political theory; and
network governance theory.
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Theories Linked to CG
Agency theory:
Is a supposition that explains the relationship between principals and agents in business.
It is concerned with resolving problems that can exist in agency relationships
Problems that agency theory addresses:
conflict in the desires or goals of the principal and agent; and
different attitudes to risk between the principal and agent
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Agency
theory
Corporate
Governance
Incentive
Schemes
Theories Linked to CG
Agency theory has its root in Economics
Originally exposed by Alchian and Demsetz (1972) and later by Jensen and Meckling (1976) and Fama and Jensen (1980)
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Theories Linked to CG
Transaction costs theory (TCE):
Transaction Cost Economics (TCE) focuses on the organization of transactions that occur whenever a good or service is transferred from a provider to a user across a technologically separable interface
Transaction costs depend on how the transaction is organised, i.e. the governance structure
The organization of transactions (“governance structure”) affects transaction cost
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Theories Linked to CG
Stakeholder theory:
Task 5: Watch Edward Freeman’s video clip on stakeholder theory.
http://www.youtube.com/watch?v=bIRUaLcvPe8
Note down what stakeholder theory posits.
What is the relationship between stakeholder theory and corporate governance?
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Theories Linked to CG
Stakeholder theory:
Stakeholder theory suggests that the purpose of a business is to create as much value as possible for stakeholders.
To succeed and be sustainable over time, executives must keep the interests of customers, suppliers, employees, communities and shareholders:
aligned; and
going in the same direction
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Theories Linked to CG
Stewardship theory:
Task 5: Watch David Brown’s video clip on stewardship theory.
http://www.youtube.com/watch?v=VLzPZuWV-rs
Note down what he says about stewardship theory.
What is the relationship between stewardship theory and corporate governance?
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Theories Linked to CG
Stewardship theory:
Holds that managers inherently seek to do a good job, maximise company profits and bring good returns to shareholders.
Managers do not necessarily do this for their own financial interest, but because they feel a strong sense of duty to the firm.
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Corporate Governance Systems
Factors determining governance structure of corporations:
the legal and regulatory framework outlining the rights and responsibilities of all parties involved in corporate governance;
the de facto realities of the corporate environment in the country; and
each corporation’s articles of association.
While corporate governance provisions may differ from corporation to corporation, many de facto and de jure factors affect corporations in a similar way. Therefore, it is possible to outline a "model" of corporate governance for a given country.
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Seminar Week 3
Discuss the links between a country’s legal system, economic development, accounting practices and corporate governance.
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Week 3 MOCG BB.pptx
Models of Corporate Governance
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Corporate Governance Systems
In each country, the corporate governance structure has certain characteristics or constituent elements, which distinguish it from structures in other countries.
As Solomon (2013:194) described: “Trying to force a country’s corporate governance into a neat category is reminiscent of the ugly sisters’ attempts to squeeze their unshapely feet into Cinderella’s shoes.”
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Corporate Governance Systems
Constituent elements of corporate governance structure:
key players in the corporate environment;
the share ownership pattern in the given country;
the composition of the board of directors (or boards, in the German model);
the regulatory framework;
disclosure requirements for publicly-listed stock corporations;
corporate actions requiring shareholder approval; and
interaction among key players.
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Corporate Governance Systems
Categorisation of CG systems:
CG systems can be categorised into:
Insider dominated systems; and
Outsider dominated systems
Categorisation into these two categories is loose:
The terms ‘insider’ and ‘outsider’ describes two extremes
Most systems fall somewhere between the two extremes
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Factors Shaping CG Systems
Internal Factors:
Corporate ownership structure;
State of the economy;
Legal system;
Government policies;
Culture; and
History.
External Factors:
Capital inflows from abroad
The global economic climate
Cross-border institutional investment
Solomon (2010; 2013)
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Factors Shaping CG Systems
Diffusion Studies’ Factors:
Endogenous factors – the efficiency or rational explanation, e.g. strength of a country’s stock market; and
Exogenous factors – social legitimation explanation, e.g. liberalization, globalisation and presence of foreign institutional investors;
Aguilera and Cuervo-Cazurra (2004); Zattoni and Cuomo (2008)
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Factors Shaping CG Systems
Organisational Isomorphism’s Factors:
Coercive isomorphism factors;
Mimetic isomorphism factors; and
Normative isomorphism factors.
(Di Maggio and Powell, 1983)
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Legal Origin of CG Models
Shleifer and Vishny (1997); and La Porta et al. (2000) discussed:
Legal history and corporate governance developments
Legal enforcement and corporate governance development
Shareholders protection and rights and corporate governance development
Investors and creditors protection against expropriation by management and large owners
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Needs for models:
Models are needed to evaluate the principles that continuously apply to the LOGIC of corporate governance
Learning
Oversight
Guidance
Information
Culture
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Models of Corporate Governance
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Key Players in Corporate Governance:
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Models of Corporate Governance
The Corporate Governance Triangle
Shareholders
Management
Board of Directors
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Two main models:
Insider, or Bank-oriented, or Continental European
companies owned and controlled by a small number of major shareholders
Outsider, or Market-oriented, or Anglo-American
most firms are controlled by managers but owned by outside shareholders
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Models of Corporate Governance
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Models of CG – Outsider System
| Factor | Feature |
| Ownership of firm | Controlled by managers but owned by outside shareholders |
| Agency problems | High due to high separation |
| Conflict of interest | High |
| Hostile takeover | Usual/ frequent (acts as a disciplining mechanism on management. |
| Ownership of shares | Dispersed ownership |
| Market for corporate control | Developed and active |
| Managerial discipline | More pronounced |
| Control | Moderate control by a large range of owners |
| Shareholders protection | High (strong investor protection in company law) |
| Leverage | Low debt/equity ratio |
| Interest in firm’s strategic goals | Low |
| Abuse of controlling rights | Potentially low -potential for shareholder democracy (no transfer of wealth from minority to majority shareholders) |
| Voice | More by exit than voice |
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Models of CG – Insider System
| Factor | Feature |
| Ownership of firm | Inside shareholders - banks, family , government, etc. |
| Agency problems | Low due to little separation of ownership and control |
| Conflict of interest | Low |
| Hostile takeover | Rare |
| Ownership of shares | Concentrated in small groups of shareholders |
| Market for corporate control | Less developed and passive |
| Managerial discipline | Less pronounced |
| Control | Excessive control by a small group of insiders |
| Shareholders protection | Low (weak investor protection in law) |
| Leverage | High debt/equity ratio |
| Interest in firm’s strategic goals | High |
| Abuse of controlling rights | Potentially high (potential for abuse of power by majority shareholders) |
| Voice | Majority shareholders tend to have more voice |
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Models of CG
The Anglo-American Model:
Share ownership by individuals
Share ownership by institutional investors not affiliated with the corporation (outsiders)
Well-developed legal framework defining the rights and responsibilities of three key players: management, directors and shareholders
A comparatively uncomplicated procedure for interaction between shareholder and corporation as well as among shareholders during and outside AGM
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Models of CG
The Continental European Model:
Banks hold long-term stakes in German corporations
Bank representatives elected to boards
Two-tiered board structure (management board, composed entirely of insiders, and supervisory board, composed of employee representatives and shareholders representatives).
Size of supervisory board set by law.
Voting rights are legally restricted
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Models of CG – Examples of CG Systems
Germany:
| Factor | Feature |
| Main business form | Public and private limited companies |
| Main ownership structure | Financial and non-financial companies |
| Legal system | Civil law |
| Board structure | Dual |
| Key feature | Employee representation |
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Key Features of German Model:
Two-tiered board structure – management board and supervisory board
Size of the supervisory board – set by law and cannot be changed by shareholders
Voting rights restrictions – legal provisions limits a voting rights of a shareholder to a pre-determined %
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Models of CG – Examples of CG Systems
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Management Board
“VORSTAND”
Employees/Labour Union and Shareholders
Responsible for daily management of the company
German Model
Supervisory Board
“AUFSICHTSRAT”
Responsible for appointing the management board
Responsible for appointing members to the supervisory board
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Models of CG – Examples of CG Systems
France:
| Factor | Feature |
| Main business form | Public and private limited companies |
| Main ownership structure | State, Institutional Investors and individuals |
| Legal system | Civil law |
| Board structure | Unitary |
| Key feature | Multiple voting rights |
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Models of CG – Examples of CG Systems
Japan:
| Factor | Feature |
| Main business form | Public limited company |
| Main ownership structure | Keiretsu |
| Legal system | Civil law |
| Board structure | Dual |
| Key feature | Keiretsu |
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Main Players:
Main bank – a major inside shareholder
Affiliated company (keiretsu) – a major inside shareholder
Management
Government
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Models of CG – Examples of CG Systems
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Supervisory Board
Shareholders
President
Executive Management
Company
Appoint
Own
Manages
Manages
Ratifies President’s Decisions
Main Bank
Own;
Provides Loans
Monitors, Acts in Emergency;
Provides Managers
Japan
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Models of CG – Examples of CG Systems
UK:
| Factor | Feature |
| Main business form | Public and private limited companies |
| Main ownership structure | Institutional investors and individuals |
| Legal system | Common law |
| Board structure | Unitary |
| Key feature | Institutional investors |
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Models of CG – Examples of CG Systems
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Board of Directors
Shareholders
Officers or Managers
Company
Elect
Own
Manages
Monitors & Regulates
Appoints and Supervises
Regulatory or Legal System
Stakes in
Anglo-American Model
Creditors
Lien on
Stakeholders
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Models of CG – Examples of CG Systems
South Korea:
| Factor | Feature |
| Main business form | Public and private businesses |
| Main ownership structure | Chaebol |
| Legal system | Civil law |
| Board structure | Unitary |
| Key feature | Chaebol: Growth in Institutional ownership |
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Models of CG – Examples of CG Systems
South Africa:
| Factor | Feature |
| Main business form | Public and Private |
| Main ownership structure | Dispersed ownership |
| Legal system | Hybrid or mixed |
| Board structure | Unitary |
| Key feature | Institutional ownership |
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Models of CG – National Business Systems
National Business Systems:
... a manifestation of the idea that economic organization, including corporate governance and the market/hierarchy choice bears a strong national mark.
…various national institutions and historical incidents help explain the path-dependent and systemic nature of business system.
... is a means of conceptualising:
the close connections between dominant social institutions and ways of coordinating economic activities
interrelations between firms and market characteristics
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Models of CG – National Business Systems
Business systems are characterised by:
different ways of organising and coordinating transactions
different types and levels of specialization
the degree of separation between ownership and control (mode of corporate governance)
organising principles that influence firm routines and capabilities through their influence on authority relations, organizational structures, relations between the professions, etc.
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Capitalism:
Capitalism is an economic system based on private ownership of the means of production and capital goods, and the production of goods and services for profit in a market economy.
Features: capital accumulation; competitive markets; wage labour.
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Models of CG – National Business Systems
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Models of CG – National Business Systems
Varieties of Capitalism
Liberal market economies: firms coordinate their activities through hierarchy and competitive market arrangements
Coordinated market: firms depends heavily on non-market relationships to coordinate their endeavours with others and to construct their core competencies
Hall and Soskice (2001: 8)
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Models of CG – Culture and CG
Culture is another factor that might influence corporate governance (Dyck and Zingales, 2004; Licht et al., 2005)
Culture and legal systems are identical
within a country
Investor protection differs significantly
among countries (La Porta et al., 1998;
1999; 2000)
Legal system has an influential impact on corporate governance La Porta et al. (2000)
Cultural dimensions theory (Hofstede, 1980)
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Models of CG
Questions for reflection:
Explain the differences between corporate governance that is characterised by dispersed share ownership and concentrated share ownership.
Explain the relationship between corporate governance and legal system of a country.
How would you describe the effects of capital market development on corporate governance practices in the Anglo-American economies?
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“In 2007, corporate governance became a well-discussed topic in the business press. Newspapers produced detailed accounts of corporate fraud, accounting scandals, excessive compensation, and other perceived organizational failures; many of which culminated in lawsuits, resignations, and bankruptcy. Central to these stories was the assumption that somehow corporate governance was to blame.” (Larcker and Tayan, 2008).
Do you agree with this statement? Which corporate governance model would be best suited to solving such reported problems? Support your view with a discussion, making reference to relevant academic work and other published sources.
Seminar Week 4
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References
Aguilera, R. V. and Cuervo-Cazurra, A. (2004) Codes of good governance worldwide: What’s the trigger?, Organization Studies, 25(3), 417–46.
DiMaggio P. J. and W. W. Powell (1983) The Iron Cage Revisited: Institutional Isomorphism and Collective Rationality in Organizational Fields, American Sociology Review, 48(2), 147–160.
Dyck, A. and L. Zingales (2004) Private Benefits of Control: An International Comparison, The Journal of Finance, 59(2), 537–600.
Hall, Peter and David Soskice (eds) (2001) Varieties of Capitalism: the institutional foundations of comparative advantage, Oxford: Oxford University Press.
Hofstede, G. (1984). Culture's Consequences: International Differences in Work-Related Values (2nd ed.). Beverly Hills CA: SAGE Publications. ISBN 0-8039-1444-X.
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References
La Porta, R., F. Lopez de Silanes, A. Shleifer, and R. Vishny (1998) Law and Finance, The Journal of Political Economy, 106(6), 1113–1155.
La Porta, R., F. Lopez de Silanes, A. Shleifer, and R. Vishny (2000) Investor Protection and Corporate Governance, Journal of Financial Economics, 58(1-2), 3–27.
La Porta, R., F. Lopez de Silanes, A. Shleifer, and R. Vishny (1999) Corporate Ownership Around the World, The Journal of Finance, 54(2), 471–517.
Licht, A. N., C. Goldschmidt, and S. H. Schwartz (2005) Culture, Law, and Corporate Governance, International Review of Law and Economics, 25(2), 229–255.
Shleifer, A. and Vishny, R. (1997) A Survey of Corporate Governance, Journal of Finance, 52(2), 737–783.
Zattoni, A. and F. Cuomo (2008) Why Adopt Codes of Good Governance? A Comparison of Institutional and Efficiency Perspectives, Corporate Governance: An International Review, 16(1), 1–15.
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Week 4 DOCG 1 BB.pptx
Antecedents of Corporate Governance
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Antecedents of CG
Market confidence is crucial for economic development and growth
Waves of corporate failures (e.g. recent corporate failures) are worrying signs
CG has developed due to these failures and to enhance investors confidence
CG has developed to give confidence to providers of capital which is necessary for economic development
What are the antecedents of Corporate Governance?
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Antecedents of CG
The 1800s:
Limited liability companies (1855 Limited Liability Act)
The company as a separate and legal entity
The joint stock companies (1844 Joint Stock Companies Act)
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Time line in the developments of corporate governance
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The 1900s:
The great depression
The rise in protectionism and the Keynesian economists
The Berle and Means (1932) arguments
Antecedents of CG
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The debate continued …
The Berle (1931) vs. Dodd (1932)
The Contractarian vs. communitarian views
The Monotonist vs. pluralist views
Antecedents of CG
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Then …
The principal - agent debate
The information asymmetry squabbles
The conflict of interests dilemma
Coase (1937), Jensen and Meckling (1976), Fama (1980)
Antecedents of CG
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...and the term corporate governance emerged!
In 1983 the term Corporate Governance featured as the title of a paper in Perspectives on Management (Earl, 1983).
In 1984, the term appeared as the title of a report to the American Law Institute and in the same year as a book title in the UK with the caption “Corporate Governance – Practices, Procedures and Powers in British Companies and Their Boards of Directors” by R .I. Tricker (1984).
Antecedents of CG
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Antecedents of CG
The takeover era ...
In the 1980s
Corporate governance, as a subset of corporate law and practice, took on a new life of its own.
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Antecedents of CG
The fat cat era ...
In the UK (90s)
Maxwell communications
Bank of Credit and Commerce International (BCCI) and Polly peck
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Development of Corporate Governance (CG) Codes
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Development of CG Codes
Codes of practice for public companies developed as a result of:
shareholder activism;
professional bodies involvement; and
regulatory bodies involvement.
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Development of CG Codes
Examples of codes of practice:
Principles of Good Corporate Governance and Best Practices Recommendations 2003 (Australia)
The Code of Corporate Governance for Listed Companies 2001 (China)
The German Corporate Governance Code 2003 (The Cromme Code)
Corporate Governance Code (il Codice di Autodisciplina delle societa quotate rivisitato) 2002 (Italy)
The Dutch Coporate Governance Code 2004 Netherlands
UK Corporate Governance Code 2016
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Development of CG Codes
The first code of governance was produced in the US in the late 1970s
In 1989, the Hong Kong Stock Exchange issued a code of best practices for listed companies regulatory bodies involvement
The statement of Best Practice on the Role and Responsibility of Directors of Publicly Listed Companies- Ireland
(Aguilera and Cuervo-Cazurra, 2004)
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Development of CG Codes
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| Old World (1995-2002) | New World (2003-Onwards) |
| Executive Decisions | Executive Accountability |
| Creative Accounting | Compliance Accounting |
| Secrecy | Transparency |
| Industry Guidance | Industry Oversight |
| Investors Seek Big Ideas | Investors Seek Value |
| Guidelines | Policies |
| Management | Governance |
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Examples of Corporate Governance Initiatives
The enactment of the Foreign Corrupt Practices Act 1977 – US
Cadbury Report 1992 – UK
King Report 1994 – South Africa
Bosch Report 1995 – Australia
Canadian Institute of Chartered Accountants Principles 1995 – Canada
UK Corporate Governance Code 2018
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Development of Corporate Governance Codes in the UK
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Features of CG Provisions in the UK
The board structure – a balanced board
Separation of the roles of the chair and CEO
Board tenure and composition
The role of the NED
The senior NED
The board committees
Audit committee
Remuneration committee
Nomination committee
Risk management and internal control
The review of board effectiveness and monitoring
The investors relations
The roles of the institutional investors
Whistle blowing policy
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Development of CG Codes in the UK
Cadbury Report 1992 Greenbury Report 1995
Hampel Report 1998 (Combined Code)
Turnbull Report 1999
Higgs Report 2003 Tyson Report 2003 and Smith Report 2003
Redraft of the Combined Code 2003 Review of the impediments to Voting UK Shares 2004 & 2005
Corporate Governance: A Practical Guide 2004 Pension Scheme Governance – Fit for the 21st Century (NAPF) 2005
Internal Control: Revised Guidance for Directors 2005
Revised Combined Code 2006, 2008, 2009 Revised Guidance on Audit Committees 2008 and Turner Review March 2009 The Stewardship Code 2010 The Kay Review of UK Equity Markets and Long-term Decision Making The Kay Report 2013
The UK Corporate Governance Code September 2012, September 2014, September 2016, July 2018
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The main recommendations of the Cadbury committee:
Balance board
Separation of the position of the Chairman and CEO
Accountability
Role of the institutional investors
The Cadbury Report (1992)
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The Cadbury Report (1992)
What would be your own idea of a balanced board and why?
http://www.youtube.com/watch?v=aReRgiC325Y
balanced board
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The Cadbury Report (1992)
Standards of financial reporting & accountability:
“.....it is, however, the continuing concern about standards of financial reporting and accountability, heightened by BCCI, Maxwell and the controversy over directors’ pay, which has kept Corporate Governance in the public eye.” (The Cadbury Report, 1992:8)
Confidence in financial reporting:
“....its sponsors were concerned at the perceived low level of confidence both in financial reporting and in the ability of auditors to provide the safeguards which the users of company reports sought and expected.”
(The Cadbury Report, 1992: 13, section 2.1)
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The Cadbury Report (1992)
Board effectiveness:
“....these concerns about the working of the corporate system were heightened by some unexpected failures of major companies and by criticisms of the lack of effective board accountability for such matters as directors’ pay.”
(The Cadbury Report, 1992: 13, section 2.2)
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Cadbury Report – Comply or Explain
UK corporate governance has preferred the “comply or Explain” approach.
The comply or explain approach is voluntary.
It is in keeping with the preferred approach of company law (self-regulation).
The Cadbury Report emphasized the importance of adopting an approach that encouraged compliance with a voluntary code of best practice.
The “comply or explain” approach is preferred to a statutory code.
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Comply or Explain
25th Anniversary of the UK Corporate Governance Code
“With the publication of the Cadbury Report in 1992 and subsequent creation of the UK’s Corporate Governance Code, the quality of corporate governance has been greatly enhanced and is globally renowned. A key reason why global investors commit their capital to UK listed companies is the trust and confidence the Code engenders, thereby benefiting UK society in the long-term through jobs, growth and prosperity.” FRC, 2017
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The Greenbury Report (1995)
Was the result of one of the recommendation of the Cadbury Committee (Cadbury Report, 1992: page 17 section 3.12).
Set up by the Confederation of British Industry (CBI) in January 1995 with the main objective:
“To identify good practice in determining directors‟ remuneration and prepare a code of such practice for use by UK PLC” (Greenbury Report, 1995: 5 section 1 .2)
The Greenbury Committee also produced a Code of Best Practice which deals with the following issues:
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The Greenbury Report (1995)
the establishment, membership and status of remuneration committees;
the determination of remuneration policy for executive directors and other senior executives;
the disclosure and approval of the details of remuneration policy; and
the length of service contracts and the determination of compensation when these are terminated.
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The Hampel Report (1998)
The Hampel Committee:
conducted a review of the Cadbury code and its implementation to ensure that the original purpose is being achieved, proposing amendments to and deletions from the code as necessary;
reviewed the role of directors, executive and non-executive, recognising the need for board cohesion and the common legal responsibilities of all directors;
pursued other relevant matters arising from the report of the Study Group on Directors’ Remuneration chaired by Sir Richard Greenbury;
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The Hampel Report (1998)
address the roles of shareholders in Corporate Governance issues;
addressed the role of auditors in Corporate Governance issues; and
dealt with any other relevant matters.
The report was submitted in January 1998.
In June 1998, a Combined Code that was derived from the recommendations of the Cadbury and Greenbury Reports was issued.
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The Turnbull Report (1999)
The report of the Turnbull Committee focused on three main provisions of the Combined Code (provisions D.2, D.2.1, and D.2.2).
System of internal controls:
D.2. states that: "the board should maintain a sound system of internal controls to safeguard shareholders’ investment and company assets”.
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The Turnbull Report (1999)
Effectiveness of internal control system:
D.2.1 states that: “the directors should at least annually conduct a review of the effectiveness of the group’s system of internal controls and should report to shareholders that they have done so. The review should cover all controls, including financial, operational and compliance control and risk management”.
Internal audit:
D.2.2 states that: “companies which do not have an internal audit function should from time to time review the need for one”.
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The Higgs Reports (2003)
The Higgs committee reported on the role and effectiveness of non-executive directors.
Effective NEDs need four personal attributes to carry out the responsibilities of their role:
integrity and high ethical standards
sound judgement
the ability and willingness to challenge and probe, and
strong interpersonal skills
(Higgs, 6.12)
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Smith Report (2003)
The Smith Committee reported on five main areas of the Audit Committee. These are its:
Purpose;
Membership, procedure and resources;
Relationship with the board;
Roles and responsibilities; and
Communications with shareholders.
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Tyson Report (2003)
The Tyson report on the recruitment and development of NEDs recommends that:
The selection of each non-executive director (NED) should rest on a careful assessment of the needs and challenges of a particular company and on a broad, transparent and rigorous search that reflects this assessment.
Company’s size and age, the makeup of its customer and employee base, the extent of its participation in global markets, its future strategies, and its current board membership are important determinants of its NED requirements.
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Tyson Report (2003)
Diversity in the backgrounds, skills, and experiences of NEDs enhances board effectiveness by bringing a wider range of perspectives and knowledge to bear on issues of company performance, strategy and risk.
Broader, more rigorous and more transparent search processes for NEDs would not only enhance board talent and effectiveness but would also foster greater diversity in the background, experience, age, gender, ethnicity and nationality of NED.
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Comparisons of the Reports so far
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Seminar Week 5
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Using the Turnbull Guidance, explain the nature of the internal control failures in the following incidents:
A serious breach of health and safety regulations at a foreign subsidiary, resulting in a number of deaths and serious injuries to employees.
An important new IT system introduced by the company without adequate testing of the back-up system in the event of system failure.
Large expenditures on capital assets made without proper authorisation and invoices are not available for some of the money spent. Two managers have been dismissed as a result.
Explain who should have responsibility for the implementation and the effectiveness of a system of internal control.
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Week 5 DOCG 2 BB.pptx
Development of Corporate Governance Codes in the UK 2
1
The Combined Code 2003
Was the biggest shake-up in boardroom culture.
Retained much of the flavours of the Higgs Report 2003.
Retained almost all of the 50 recommendations contained in Higgs’ original report.
Only changed the language , not the message of Higgs Report.
Focused on readdressing executive remuneration i.e. forcing companies to avoid excessive remuneration
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The Combined Code 2006
From January to April 2006 changes were made to the Combined Code 2003.
The changes focused on were:
relaxing the guidance that allowed the company chairman to sit on the remuneration committee;
adding new provisions regarding companies, including ‘vote withheld’ box on the AGM proxy voting forms; and
publishing the results of resolutions voted on a show of hands.
The 2006 Code also placed emphasis on shareholder activism as a means of furthering corporate accountability and transparency.
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Changes to the Combined Code 2006
removed the restriction on an individual chairing more than one FTSE 100 company (provision A.4.3); and
for listed companies below the FTSE 350, allow the company chairman to be a member of, but not chair, the audit committee provided he or she was considered independent on appointment (provision C.3.1).
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The Combined Code 2008
The Financial Reporting Council revised and re-issued the Combined Code in June 2008. It responded to:
Which parts of the Code have worked well?
Do any parts require further enforcement?
Are there any aspects of good governance practice not addressed by the 2006 Code that should be?
Is comply or explain approach operating effectively? Could it be improved?
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The Turner Review 2009
The Turner Review, March 2009 on the global financial crisis
Key recommendations
Firms ensure their remuneration policies are consistent with effective risk management; and
Remuneration committees should arrive at independent judgements concerning the implications of remuneration on risk and risk management.
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The Walker Review 2009
Conclusions:
The combined code 2008 was fit for purpose and the ‘comply or explain’ approach was the most effective means of improving corporate governance in the banking sector.
Weaknesses in board effectiveness were more attributable to behavioural patterns than organisation
Boards should devote significantly more time to risk and risk management.
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The Walker Review 2009
Core institutional investors should engage more effectively with investee companies in order to ensure a focus on long-term value and performance.
Significant improvement in the structuring of remuneration policy.
Stewardship Code be developed
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The UK Corporate Governance Code 2010
The Stewardship Code 2010 (updated in 2012) – an outcome of the Walker Review 2009.
The Code had equivalent status to UK Corporate Governance Code (The UK Corporate Governance Code 2010)
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The Stewardship Code
Institutional investors should:
publicly disclose their policy on how they will discharge their stewardship responsibilities;
have a robust policy on managing conflict of interest in relation to stewardship and this policy should be publicly disclosed;
monitor their investee companies;
establish clear guidelines on when and how they will escalate their activities as a method of protecting and enhancing shareholder value;
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The Stewardship Code
be willing to act collectively with other investors where appropriate;
have a clear policy on voting and disclosure of voting activity;
report periodically on their stewardship and voting activities;
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The UK Corporate Governance Code 2012
In 2012, the Combined Code was replaced by the Corporate Governance Code 2012 (effective 1 Oct 2012).
Under this Code the FTSE 350 companies have to put external audit contract out to tender at least every ten years.
Audit committees required to disclose information on how they had (1) discharged their responsibilities and (2) assessed the external audit’s effectiveness to shareholders
Companies required to explain their policies on boardroom diversity
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The Kay Review 2012
Instituted in June 2011.
To review the extent to which UK equity markets were providing adequate support to British businesses, to allow the UK gain and maintain competitive advantage in global markets.
The Kay Review 2012 highlighted a lack of trust and ongoing short-termism as the main problems within the UK financial services sector
The review proposed a set of 10 principles and 17 recommendations
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Evolution of the UK Corporate Governance Code
A revised version of the Combined Code published in June 2008.
The FRC published their final report on the review of the effectiveness of the Combined Code on 1 December 2009.
A revised version of the UK Corporate Governance Code was published by the FRC on 28 May 2010.
Developments in corporate governance 2011: The impact and implementation of the UK Corporate Governance and Stewardship Codes Report published in December 2011
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Evolution of the UK Corporate Governance Code
On 6 November 2012 the FRC published a collection of essays to mark the 20th anniversary of the Cadbury Code which introduced the UK's 'comply or explain' approach to best practice in the organisation of corporate boardrooms and their relations with shareholders.
In September 2014 a Revised version of the UK Corporate Governance Code was published, applying to accounting periods beginning on or after 1 October 2014.
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Evolution of the UK Corporate Governance Code
In September 2015 the FRC opened a new consultation incorporating the feedback on auditing and ethical standards.
On 27 April 2016 the FRC published a final draft update to the UK Corporate Governance Code.
In February 2017, the FRC announced plans for a fundamental review of the UK Corporate Governance Code. This looked at corporate culture and succession planning, and the issues raised in the Government’s Green Paper and the report by the Business Enterprise and Industrial Strategy (BEIS) Select Committee Inquiry.
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2016 UK Corporate Governance Code
Published on 17 June 2016 by FRC.
Applies to accounting period beginning on or after 17 June 2016.
Designed to comply with new EU regulations on statutory audit.
accompanied by:
updated guidance on audit committees,
the revised ethical standard 2016, and
revised auditing standards 2016.
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2016 UK Corporate Governance Code
Key amendments:
Audit committee should be composed of members who have “recent and relevant financial experience”.
The head of internal audit should be, or is expected to be, invited regularly to attend the audit committee.
Where risk management and internal control responsibilities are delegated to different committees, the board should consider the impact of splitting those responsibilities.
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2016 UK Corporate Governance Code
Audit committee has the responsibility to consider the clarity of audit committee reporting.
The audit committee should be prepared to meet investors, to ensure that shareholder interests are properly protected in relation to financial reporting and internal control.
Additional reporting requirements for audit committee to explain in its report how the audit committee composition requirements have been addressed.
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2016 UK Corporate Governance Code
Additional reporting requirements for audit committee to explain in its report how the audit committee has assessed the effectiveness of internal audit.
IAASB standards should be implemented.
Enhanced audit report will have to explain to what extent the audit was considered capable of detecting irregularities, including fraud.
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2018 UK Corporate Governance Code
Contained an updated set of principles on:
Board leadership and company purpose
Division of responsibilities
Board composition, succession and evaluation
Audit risk and internal control
Remuneration
The set of principles emphasise the value of good corporate governance to long-term sustainable success.
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Conclusions
Over the years the UK CG Code has been revised and expanded to take account of the increasing demands on the UK’s corporate governance framework.
The principle of collective responsibility within a unitary board has been a success and (alongside the stewardship activities of investors) played a vital role in delivering high standards of governance and encouraging long-term investment.
The debate about the nature and extent of the framework has intensified as a result of financial crises and high-profile examples of inadequate governance and misconduct, which have led to poor outcomes for a wide range of stakeholders.
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Seminar Week 7
Focusing on the UK, discuss the key developments in corporate governance and suggest areas of possible future developments.
(You may use a flow chart to aid your discussion and only include key points for discussion).
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References
Aguilera, R. V. and Cuervo-Cazurra, A. (2004) Codes of good governance worldwide: What’s the trigger?, Organization Studies, 25(3), 417–46.
Berle, A. and Means, G. (1932) The Modern Corporation and Private Property, New York: Transaction Publishers.
Cadbury Report, (1992) Report of Committee on the Financial Aspects of Corporate Governance: The code of best practice, London: Gee Professional Publishing.
CalPERS (1998) Corporate Governance Market Principles, Sacramento, CA: California Public Employees’ Retirement System.
Coase, R. H. (1937) The Nature of the Firm, Economica, 4(16), 386–405.
Combined Code (1998). The Combined Code, London: The London Stock Exchange.
Combined Code on Corporate Governance (2003) Perspectives on Management, Oxford: Oxford University Press.
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References
Dodd, E. M. Jr. (1932). For whom are corporate managers trustees? Harvard Law Review, 45(7), 1145-1163.
Earl M. J. (1983) Perspectives on Management, Oxford: Oxford University Press.
Fama, E. F. (1980) Agency problems and the theory of the firm, Journal of Political Economy, 88(2), 288-307.
Financial Reporting Council Ltd (2003), Combined Code on Corporate Governance, Financial Reporting Council Ltd, London.
Financial Reporting Council Ltd (2018), UK Corporate Governance Code, Financial Reporting Council Ltd, London.
Greenbury Report (1995) Directors’ Remuneration: Report of a Study Group Chaired by Sir Richard Greenbury, London: Gee Professional Publishing.
Hampel Report, (1998) The Final Report, London: The Committee on Corporate Governance and Gee Professional Publishing.
Hermes (1998) Statement of Corporate Policy and Voting Rights, London: Hermes Investment Management Limited.
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References
Higgs Report, (2003) Review of the Role and Effectiveness of Non-Executive Directors, London: Department of Trade and Industry, HMSO.
ICGN (1999) Statement on Global Corporate Governance Principles, International Corporate Governance Network (website).
Jensen, M.C. and Meckling, W. (1976) Theory of the firm: managerial behaviour, agency costs and capital structure, Journal of Financial Economics, 3(4), 305-360.
Stewardship Code (2012) The Stewardship Code, London: Financial Reporting Council, [Available at: